Even as inflation came in softer than expected in May, private-sector economists still expect the Bangko Sentral ng Pilipinas (BSP) to raise its key interest rate by at least a quarter point to 4.75 percent at the upcoming June 18 policy meeting.

Inflation moderated to 6.8 percent in May from the more-than-three-year high of 7.2 percent in April, according to data released by the Philippine Statistics Authority (PSA) on Friday, June 5. This latest reading was once again outside the central bank’s forecast range of 7.1 percent to 7.9 percent.

Despite the easing of headline inflation, core inflation—which strips out volatile food and energy items—breached the government’s four-percent ceiling, signaling that underlying price pressures continue to build.

Deepali Bhargava, regional head of research for ING Asia-Pacific (APAC), believes that because food and services inflation remain elevated and core inflation has exceeded the target range, monetary authorities will proceed with a “measured” 25-basis-point (bp) rate hike this month.

Chinabank Research agreed with ING’s assumption of a 25-bp hike in June but expects a quarter-point rate cut in August. It said the “lower-than-expected outturn supports our view that off-cycle rate hikes are unnecessary,” allowing for a “gradual and shallow” tightening cycle.

Meanwhile, Bhargava warned of “rising odds of a larger 50 bps move should there be no clear progress toward de-escalation” in the military conflict between the United States (US) and Iran.

May’s inflation figure brought the year-to-date average to 4.5 percent, still above the BSP’s two- to four-percent target range. The five-month average largely reflects the impact of higher global oil prices and supply disruptions caused by the prolonged war in the Middle East.

Bhargava said May’s inflation slowdown was “primarily driven by a partial reversal in transport inflation, while food and services inflation remained elevated.”

Domestic fuel price rollbacks of around 15 percent from their April peak helped moderate transport inflation to 16 percent, according to ING.

Chinabank Research echoed this view, noting that while volatility in the oil market persists, domestic fuel prices posted sharp rollbacks this week, with diesel down by ₱9.25 per liter, gasoline by ₱4.76 per liter, and kerosene by ₱10.86 per liter.

However, the relief from lower transport costs was partly offset by continued increases in rice prices. Inflation for the country’s staple grain accelerated to 15.6 percent in May from 13.7 percent a year ago, contributing 1.1 percentage points (ppts) to headline inflation.

Chinabank Research agreed that the “heavy-weight” basket item recorded faster price increases, although it found it encouraging that rice prices finally edged down slightly on a month-on-month basis.

Chinabank also viewed core inflation’s breach of the four-percent threshold as “a sign of broadening price pressures,” driven by “faster price gains in services, including restaurants, recreation, passenger transport, along with furnishings, household equipment, and maintenance.”

“That’s the more important signal. It means we should be concerned, but not alarmed,” said Jonathan Ravelas, senior adviser to Reyes Tacandong & Co., adding that the latest inflation data should keep the central bank cautious, with “no urgency to tighten aggressively, but no quick pivot to easing either.”

Overall, Ravelas said inflation “isn’t beaten yet, but it’s clearly losing momentum, and that’s a step in the right direction.”

Meanwhile, other observers pointed to looming upside risks to inflation. ING warned of a 61- to 87-percent chance of an El Niño event emerging by mid-2026, which could lead to rice production falling by as much as 50 percent and threaten food supply stability.

Chinabank Research also warned that electricity costs could rise, with Manila Electric Co. (Meralco) potentially increasing rates this month after relying on more expensive power sources during May’s red and yellow alerts in the Luzon grid.